A summary of recent developments in insurance, reinsurance and litigation law.

This week's caselaw

Accident Exchange v McLean: Judge considers the "iniquity exception" to a claim for privilege and whether one party can waive common interest privilege


Prior caselaw has established that, where the claimant's car has been damaged by the at-fault defendant, and the claimant hires a replacement car on credit terms, even though he could have afforded to hire one without credit terms, the damages recoverable for the loss of use of the damaged car will only be the basic hire rate ("BHR") of the replacement car (ie the hire rate stripped of the cost of any "credit" elements).

As reported in Weekly Update 21/17, the claimant in this case is a car hire company. It has established that Autofocus Limited ("AF"), which was hired by the insurers of at-fault drivers, was involved in a widespread systematic fraud whereby the company fabricated evidence to show that the BHR was lower than the hire rate charged by the claimant. AF is now in liquidation and this action is brought against AF's former directors and the solicitors of the at-fault drivers.

Following disclosure by the parties, the claimant sought inspection of documents over which the solicitor defendants asserted privilege. The claimant in turn argued that the "iniquity exception" defeated this claim for privilege. This exception provides that no legal professional privilege can be asserted "in respect of documents which are in themselves part of an iniquitous proceeding or in communications made in order to obtain advice for the purpose of carrying out iniquity".

The exception does not depend on whether or not the lawyer is party to any iniquity. In this case, it was not alleged that the solicitor defendants' clients (the drivers or their insurers) were involved in any impropriety. Smith J reviewed earlier caselaw and concluded that "in cases of third party iniquity, privilege is overridden only where the client was the wrongdoer's tool or, if it be preferred, mechanism for his wrongdoing" The judge said that the iniquity exception will apply only where there is a "particular nexus or relationship between the client and the wrongdoer" which is separate from the dealings between the client and the solicitor.

The judge went on to find that a client will be the "wrongdoer's tool" where, as a question of fact and degree, the iniquity takes the lawyer/client relationship outside the ordinary scope of professional employment. On the facts of this case, privilege was not lost because AF's wrongdoing was "parasitic" on the existing lawyer/client relationship, which was created and continued for a normal and legitimate purpose. AF had not used the drivers or their insurers as its tool.

Separately, the defendant solicitors sought disclosure and inspection of documents in the files of solicitors who were instructed to bring claims in the name of the claimant's clients (ie the innocent drivers). The judge found that the claimant and its client (the innocent driver) had a common interest: "[The claimant] and its client would clearly have a common interest in litigation against the defendant driver, and the doctrine has become less restrictive as to the interest that will attract it than when it was first recognised. However, I cannot accept either that, at least in the circumstances of this case, the privilege can be waived by one of the privilege holders alone or that [the claimant] is to be regarded as the primary privilege holder or that (therefore or otherwise) it has the power or authority to waive the common interest privilege". Reference was made to Australian caselaw where one privilege holder can waive common interest privilege if "fairness" so requires, and to textbook commentary which suggests that one of the privilege holders can waive privilege. Although the judge said that it might be possible to infer in a common interest privilege case that one of the parties had waived privilege in some cases, the documents between the claimant and the client in this case did not allow for such an inference to be drawn.

The judge found that although the agreement between the claimant and its clients permitted the claimant to receive privileged information and documents from the client's solicitors, that did not entitle the claimant to allow inspection: the client had not agreed to waive privilege altogether in the disclosed information and documents.

COMMENT: The judge's comment about the possibility of one party waiving joint or common interest privilege in some cases (although such a situation was said to arise more readily in common interest cases), might be contrasted with that of the judge's comment in the earlier decision of Winterthur v AG (see Weekly Update 09/06) that for common interest privilege to be waived both parties must agree to the waiver (although in that case, a contractual right of access to documents overrode the privilege). However, the judge here distinguished that case on the basis that here there was no dispute here between the parties which were entitled to common interest privilege.

Sophocleous v Secretary of State for the FCO: Governing law for vicarious liability/joint liability claims


The issue in this case was which governing law applied for determining limitation, where the UK government was said to be liable for acts committed in Cyprus in the 1950s. The following points were decided by the court:

(1) The claim for vicarious liability arose in the place where the primary tort was committed – here, Cyprus: "vicarious liability is not, conceptually, a tort. It is the description of a legal rule which imposes liability for someone else's tort. I therefore do not see how the party vicariously liable, wherever located in the world, can be taken to have incurred vicarious liability other than in the place where the primary tort is committed".

(2) The claim for joint liability/common design tort is not like a claim for vicarious liability. However, the judge concluded that "the location of the common design liability should be the same as the location of the ultimate individual perpetrator's liability, which is also that of the other partner in the common design. I think it is artificial to treat the common design liability of the defendants, jointly with the then Colonial Administration, as located in a different country from that in which the ultimate perpetrators of the assaults, who executed the design, are located".

However, despite the above findings, Kerr J went on to find that the "flexible exception" found in Lord Wilberforce's speech in Boys v Chaplin [1971] applied, so that the law of England, and not Cyprus should be applied for the purpose of determining whether they were committed. The law of limitation governing those alleged torts was therefore also English law.

UK Insurance Ltd v Gentry: Judge considers whether fraudulent claim against insurer had been proven


Following a collision between two cars, the insurers of the allegedly negligent driver paid the defendant (after he obtained default judgment against their insured). However, the insurers then brought an action against the defendant seeking damages for deceit. They alleged that the accident had been staged.

Much of the case turns on its particular facts, with Teare J acknowledging that "There is rarely direct evidence of fraud. Where there is no direct evidence of fraud it can only be inferred from circumstantial evidence", with particular assistance often being gained from contemporaneous documents. Of particular importance in this case was that the drivers of the two cars were friends. The judge commented that " Of course it is possible for two friends to suffer a collision when driving their respective cars. It would however be a striking and unlikely coincidence. Another explanation for the collision is that the two friends had staged the collision; that would explain the apparent but unlikely coincidence". Of further importance here was the fact that they had initially tried to hide that friendship from the insurers. The defendant sought to argue that this was a case of fraudulent devices, in that he had lied for an innocent reason, namely "not to slow down the payment of a genuine claim" or because he feared that knowledge of the friendship might suggest to the insurers that the collision was not genuine because it was too much of a coincidence to be true. That argument was rejected by the judge who held that "The fact that the two drivers were friends and the circumstance that each of the persons present at the time has been reluctant to disclose that friendship are matters which, in my judgment, cogently suggest that the collision was staged".

The judge found in favour of the insurers.

Cyprus Popular Bank v Vgenopoulos: Court of Appeal confirms that freezing order obtained abroad can be registered and served here pending an appeal against registration


A bank commenced proceedings in Cyprus and obtained a worldwide freezing order from the Cypriot court. It then registered that freezing order as a judgment of the English High Court (pursuant to Article 38 of the Judgments Regulation (EC Regulation 44/2001)). The two novel issues in this case were:

(1) Whether the worldwide freezing order became immediately effective and fully enforceable here or whether it only became effective and fully enforceable if no appeal is brought in respect of the registration order within 2 months (or, if an appeal is brought, once that appeal is determined). The Court of Appeal held that the order had become immediately effective and enforceable; and

(2) What is meant by "measures of enforcement" as referred to in Article 47(3) of the Judgments Regulation. Article 47(3) provides that during the time specified for an appeal against registration, no "measures of enforcement" may be taken. The issue in this case was whether that just means the processes in which the court is involved in securing enforcement, or whether it also includes service of the worldwide freezing order and/or notification of the order to third parties. The Court of Appeal favoured the argument that, as a question of English law, "enforcement" of a judgement entails the invocation of the process of the English court. However, it did not need to decide the point because it also held that service/notification are not "measures of enforcement" prohibited by Article 47(3) (even if they contain a penal notice).

Argarwal Coal v Harmony Innovation Shipping: Interpretation of an arbitration notice and whether it commenced one or two arbitrations

Clyde & Co (Irvine Marr and David M Owens) for the claimant

The main issue in this case was whether the charteree had commenced one or two arbitrations with the charterers. This in turn required an examination of the arbitration notice which was sent to two companies in the charterers' group. This notice had referred to commencement of "arbitration" rather than "arbitrations".

Section 14 of the Arbitration Act 1996 deals with commencement of arbitration proceedings and the judge referred to earlier caselaw which has given this section a broad and flexible interpretation. The judge rejected too literal an approach to interpretation and took into consideration certain points of the factual matrix eg the previous dealings between the parties. The judge also considered that the arbitration clause was a necessary part of the context: "Notices commencing arbitration are drafted with the relevant clause in mind, and are read likewise".

The judge concluded that on the facts of the case, two arbitrations had been intended, and there should be no focus on the use of the singular "arbitration". Instead: "the context in which the arbitration arose indicated that both parties would be in the frame, not because they were seen as jointly liable, but because there was an uncertainty as to which of them was the true party to a bi-partite contract".

Although not necessary to do so in this case, the judge also held that it is generally permissible to look at matters which post-date the notice when interpreting the notice, as such matters can be relevant.

A further issue in the case was that an application under Section 28 of the 1996 Act (to order the tribunal to reconsider and adjust the amount of the arbitrators' fees and expenses) could not proceed because the arbitrators had not been made defendants.